Insolvency court judgment highlights reporter’s role in scrutinising outlays
Following a Court of Session judgment earlier this year, we have been contacted by members looking for clarification of its impact on our insolvency practitioner (IP) members and affiliates.
The opinion by Lord Braid relates to the petition by Blair Carnegie Nimmo and Alistair McAlinden, as the former joint administrators of Future Renewables Eco plc (in administration) (the company) for an order to fix the former joint administrators’ remuneration and outlays.
Joint administrators (JAs) were appointed over the company on 14 September 2021. The JAs were replaced by creditors on 25 November 2021.
The JAs subsequently claimed remuneration of £302,662, of which £70,344 relates to the period from 26 November 2021 until 29 April 2022 - a five-month period after they had been replaced as administrators. They also requested outlays of £93,706 including legal fees of £70,971.
The creditors’ committee failed to reach a decision, therefore, the JAs applied to court to fix their remuneration and outlays.
The appointed court reporter (‘the reporter’) recommended a reduction to the remuneration of £40,565, resulting in a total fee of £262,096, of which £57,021 relates to the period after the JA’s appointment had ended. The reporter approved the outlays in full. After conferring with the reporter, the auditor issued a report to similar effect.
The JAs were content with the outcome, but the new administrators objected to the fee, claiming it to be excessive and not representative of fair value.
Lord Braid goes on to narrate in some detail the issue of the locus of the replacement administrators to object to the remuneration. The matter of the quantum of the fee for post-appointment work undertaken is also extensively discussed, as it represents the primary concern of the replacement administrators.
The judgment is further a useful reminder that while it is acceptable for court reporters to seek clarifications or further explanation on any points of detail to allow them to complete a report and form opinions, they should not enter discussions and negotiate with the appointed insolvency practitioners about proposed reductions to fees. As Lord Braid points out, “It is not a reporter’s function to negotiate a fee, rather it is to give advice to the court”.
Approval of outlays
The judgment is recommended reading for its insight on the various points outlined. However, the main topic of interest to our insolvency practitioners and their staff is likely to concern the discussions around outlays and, specifically, the reporter’s failure to consider their reasonableness.
As mentioned above, the JAs requested outlays of £93,706 including £70,971 for legal fees.
The court took issue with the lack of scrutiny of the substantial legal fees, stating:
There has been no inquiry, either by the reporter or the auditor, into whether the outlays were reasonably incurred. By referring exclusively to category 1 expenses, the reporter has fallen into error.
While the court acknowledged that the reporter was correct to conclude that the legal fees are a category 1 expense in terms of SIP 9, Lord Braid goes on to state:
SIP 9 is a non-statutory statement of practice issued by regulators, with no statutory effect. It cannot trump the Rules, nor does it purport to do so. It merely states that a category 1 expense can be paid without prior approval. It says nothing about whether or not such an expense is to be taken to have been reasonably incurred.
As for the petitioners’ argument that, as officers of the court, they can be trusted not only to pay, but to approve, their own outlays, that is in flat contradiction to the rules, which require an administrator to seek the approval, either of the creditors or the court, for outlays reasonably incurred.
The matter has therefore been remitted back to the reporter for further consideration of two issues:
- Whether the legal fees are reasonable for the work commissioned.
- If they were reasonable in that sense, whether they were reasonably incurred in the administration.
The court concludes that “it is only if the fees pass both tests that they ought to be charged to the administration”.
On the first point, and in the interests of transparency, the court has ordered the legal fees to be taxed before the reporter then considers the separate question of whether they were reasonably incurred. The reporter has also been instructed to consider whether all other outlays, be they category 1 or category 2 in terms of SIP 9, including other legal fees, were reasonably incurred.
As pointed out in the judgment, SIP 9 is of no consequence when seeking approval of remuneration and outlays. The approval process is laid out in the Insolvency (Scotland) (Company Voluntary Arrangements and Administration) Rules 2018 and the Insolvency (Scotland) (Receivership and Winding up) Rules 2018 (collectively ‘the rules’). SIP 9 has no statutory effect.
The distinction between category 1 and category 2 expenses in SIP 9 relates purely to the timing of their payment – whether approval is required before they can be met from estate funds. It is not intended to imply that category 1 expenses do not need to be subject to scrutiny and approval to ensure that they are reasonable and have been reasonably incurred.
The rules set out that the approving party must issue a determination fixing the amount of the outlays and remuneration payable in the relevant accounting period. Outlays are not otherwise defined, and no distinction is made between any categories of outlay for this purpose. An insolvency practitioner therefore needs approval of all remuneration and outlays – essentially any payment made during the accounting period.
This position in not new – the terminology of the legislation in place now is the same as that which has been in place since 1986. The ICAS court reporter pack is also clear that the reporter should:
- Confirm category 1 disbursements are disclosed and reasonable.
- Confirm the basis of charge for category 2 disbursements has been disclosed and is calculated on an appropriate basis.
While the position is unchanged, the judgment has shone a light on inconsistent application in practice – by court reporters, those applying for remuneration and outlays, and by the courts in setting out their determinations.
If the contrast is made with the procedure in Scottish sequestration cases, from where the corporate insolvency legislation in Scotland was originally derived, the Accountant in Bankruptcy audits, fixes and includes on his determination all remuneration and outlays and has never sought to distinguish the category of outlay being approved.
While the judgment has brought a renewed focus on the legislation that has long been in place, it may well raise some questions internally within firms.
To clarify we, as a regulator, would not expect firms to revisit cases where remuneration and outlay approvals or determinations may not have strictly adhered to the legislation. Clearly all payments would ultimately have been disclosed via the receipts and payments account, and the reporter is likely to have vouched them (albeit perhaps, as in this case, having not fully considered the reasonableness of category 1 expenses). Those with an interest in the remuneration and outlays will also have had the opportunity to appeal determinations if they were dissatisfied with the determination.
However, going forward IPs should ensure that such requests are made in accordance with the rules ie, that the claim itself cites the full amount of outlays incurred in the period, regardless of status/SIP9 category, and that it is that amount that the approving party determines.
We also recognise that there may be instances where it is not practical for determinations to be sought. For example, where there have been only minimal realisations resulting in no remuneration being sought and only partial outlays incurred being repaid from estate funds. We accept that in such circumstances, a pragmatic approach should be adopted and the consideration and justification for any deviation from the legislative process should be fully documented, including why the incurred outlays were reasonable.
We acknowledge that there are instances where the courts do not include the outlays figure in their interlocutor determining remuneration. In such circumstances, it is acceptable for office holder to accept the interlocutor as a determination of the outlays in the amount requested.